Medicare rules for 'observation' care are arbitrary, unjust

The state Department of Health has taken a good first step to address a growing problem for elderly and disabled people who go to hospital emergency rooms, but it does not go far enough. The department recently issued regulations concerning "observation units," where patients are monitored and assessed after the initial stay in the emergency department.

The problem with being in "observation" status is that if you are on Medicare and are discharged to a nursing home, those observation days will not count toward the three inpatient days that are required for the nursing home care to be coverable. Patients may spend three or more days in the hospital only to discover when they go to the nursing home that they were never "admitted" and thus don't have the Medicare coverage for some nursing home rehabilitation that they expected.

The new regulations do not address the situation in which patients on observation status are scattered throughout the hospital; hospitals can still operate that way, and in those cases patients still may spend days in the hospital without being "admitted" and without qualifying for Medicare coverage for their post-hospital nursing home stay. The Health Department does have a club, however, which is Medicaid reimbursement. To be reimbursed for an observation stay by Medicaid, the hospital must have the patient admitted to a discrete observation unit.

As a practical matter, it will be difficult for hospitals to split their observation patients into two categories, with Medicaid patients going to an observation unit while Medicare patients go to scattered beds. In the observation unit there must be a clear and conspicuous sign stating "This is an observation unit for visits of up to 24 hours. Patients in this unit are not admitted for inpatient services." In theory that should tip off the patient or relatives that Medicare will not cover a nursing home stay after discharge from the unit. Patients in scattered beds on observation status will not get that notice.

Since observation status is not an inpatient admission, that care is not covered by Medicare Part A. It may or may not be covered under Medicare Part B, so if the hospital wants to shift potential liability for the bill to the patient if the service is not covered, it must give the patient an "Advance Beneficiary Notice" of noncoverage. That will be of little help to the patient if he or she is in a hospital bed, awaiting various tests, and is told that Medicare may not cover the care.

Under the state regulation, a patient in the observation unit also is supposed to be admitted as an inpatient, transferred to another hospital or discharged within 24 hours after being assigned to the unit. If that rule is enforced, it could eliminate what in some cases have been lengthy observation stays of a week or more. Medicare has long provided, however, that in most cases a beneficiary may not remain in observation status for more than 48 hours, yet much longer stays are common. So even if the state rule is enforced in observation units, patients in scattered beds will not likely see any better enforcement than before.

Part of what is driving the increase in observation status is the Medicare Recovery Audit Contractor program, which is auditing hospitals for improper admissions. The hospitals thus are running scared and will err in their perceived self-interest by not admitting patients and getting paid through Part A only to have the Recovery Audit Contractor determine that it was an overpayment, thus leaving the hospital with nothing. Better to bill for the separate services under Part B and pursue the patient for whatever Part B and any supplemental insurance does not cover. That is only a partial solution for the hospital, however, because the total reimbursement for the separate Part B services is usually much less than the Part A reimbursement for a true "admission."

So under the current situation, the hospital gets paid less, the patient has a greater out-of-pocket liability and does not meet the eligibility criteria for the subsequent rehabilitation stay at a nursing home, and the government is the only winner by paying less. He who writes the rules gets the gold.

Rene Reixach is an attorney with Woods Oviatt Gilman LLP, where he concentrates his practice on health law. He formerly was executive director of the Finger Lakes Health Systems Agency.8/10/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.